NAO commends HMRC's improved approach to tackling error and fraud

But warns department has not yet achieved a sustainable reduction in losses

HM Revenue & Customs (HMRC) has improved its efforts to tackle error and fraud in tax credits but is yet to demonstrate a sustainable decrease in the level of losses, according to a report published today by the National Audit Office (NAO).

The report says that there are areas where HMRC needs to improve its data analysis, particularly regarding what happens to claimants after an intervention or what sort of circumstances suggest a claimant is likely to make a mistake in their claim. However, the NAO says some improvements in data analysis have already been made, which has helped the department increase the expected effectiveness of its work.

In particular, HMRC is currently using the PAYE system to check information in the tax credits system for new awards and existing claims. Furthermore, the department expects that the introduction of Real Time Information (RTI) in April 2013 will provide better information, thus helping to decrease error and fraud levels and ensure, both at the point of renewal and on an ongoing basis, that tax credit awards are calculated according to correct income figures.

The department is also starting to use new types of analysis and sources of data, for example by working with credit reference agencies and by using its CONNECT system, which has improved how it initially identifies risky claims.

The report says that HMRC has recognised that it can improve its use of data analysis and has plans to review whether it is using its present tools and sources to the best of their ability.

Although the NAO says HMRC has improved its approach and increased the amount of error and fraud it prevents, it warns that HMRC is yet to achieve value for money and is unlikely to meet its target of delivering £8bn in fraud and error savings from 2011/12 to 2014/15.

HMRC failed to achieve a new target, introduced in 2009, to reduce error and fraud by 5% by 2010/11, down from 9%. The figure for fraud and error of finalised payments in 2010/11 was in fact 8.1%. However, the report says, as a result of its new approach to dealing with error and fraud, instituted in April 2009, the department has significantly increased the number of interventions from 123,000 in 2008/09 to almost 2m in 2010/11.

This new approach includes increasing the number of checks on claims and targeting those claims most likely to contain fraud and error. The NAO praises HMRC for being "innovative" in its new strategy, and says that, since 2009, the department has developed approximately 40 different types of intervention aimed at reducing error and fraud, monitored their success and responded appropriately to results.

The report also says that HMRC has improved its approach during 2011/12 thanks to better use of data analysis, but the efficacy of this work cannot be properly evaluated until the next set of relevant data is available later this year.

An HMRC spokesperson said, "HMRC now have more staff in place than ever before to tackle error and fraud and have massively expanded the number of checks we carry out from around 120,000 in 2008/09 to nearly 2 million in 2010/11. HMRC continues to look at ways to add to that capacity. "Although HMRC missed the target, the principles of the strategy, including 'Check First, Then Pay', are sound, and acknowledged by the NAO as a positive way forward.

"The NAO recognise the progress HMRC has made in tackling tax credits error and fraud and we agree that we need to go further. We are determined to build on that progress and the wide range of innovative approaches we have developed since we introduced the strategy."

Amyas Morse, head of the National Audit Office, said, "The tax credit system is complicated, and HMRC will have to overcome significant challenges if it is going to achieve value for money. HMRC deserves credit for demonstrating innovation, but it has further to go to achieve sustainable reductions in tax credits error and fraud. To tackle error and fraud effectively, there needs to be an improved understanding of risks and better use of information."

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